When you're building a new home like my wife and I are, it can be a stressful and hectic time. There are a million and one decisions to make when it comes to the house. What siding should we have installed? What appliances will we buy? Will we install a deck?
While decisions about the house itself are coming fast and furious, it's also key to making other important decisions about the house and how you're going to pay for it. One of those decisions that we've been talking about this week is when we should be applying for a home loan and locking in our rate.
There are quite a few things to consider when locking an interest rate on a mortgage, so today I thought we'd take a look at when you should lock and what some of the pros and cons are.
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Locking An Interest Rate
When you're locking in an interest rate it all comes down to what sort of timing you want to have – whether you want to lock your rate early in anticipation of rates going up, or if you want to “float” and hope that the rates come down and save you money.
When you're looking at a loan, you can essentially lock in your loan at a couple of different points in the process.
- Lock after initial loan approval: Once you get your initial approval for a loan after applying, you can lock in your interest rate right away. If you expect rates to be going up, it may not be a bad idea to do this.
- Wait to lock until a home is found: Many homebuyers will hold off on locking their rate until they have a house under contract. If rates have been going down, or if you're not concerned about rates going up, it may not be a bad idea to wait.
Pros And Cons Of Locking Your Rate Right Away
If you're thinking about locking in your rate right away, it pays to be aware of the pros and cons of doing this.
- Pro – You can lock in your rate and not worry about them rising: No need to worry that you'll end up paying more because of a large rate increase. This can be especially important if your budget is already stretched thin and any increase in rates could mean not being able to afford the home.
- Pro – You can relax: Knowing that your mortgage rate is locked in means that all you have to do is shop for a house.
- Con – You may miss out on drops in the rates: If rates do in fact end up going down, you could be stuck with your rate locked in at a higher level.
- Con – It may be more expensive to lock early: When you lock in your rate, especially when it's a longer 60-90 day lock, you'll likely end up paying a bit extra on the rate, or end up having to pay points on the mortgage in order to lock. 1 point = 1% of the mortgage price.
- Con – Pressure to find a house before lock expires: When you lock in your rate usually the lock is good for 30, 45, 60 or 90 days. Since you're usually paying a bit more in either points or rate the longer the lock is, the pressure is on to find a house before the rate lock expires and you have to pay again to lock.
Pros And Cons Of Floating – Waiting To Lock Your Rate
If you're not concerned about rates going up, or you think they may actually go down, you can float and wait to lock your rate until you have a house in mind or under contract. Or you can simply wait to lock until a later time after rates have dropped. Here are some of the pros and cons.
- Pro – You can wait for rates to go down: If you think the rates may end up going down while you're looking for a home loan, it may pay to wait to lock.
- Pro – There are usually less fees if you wait to lock: If you don't lock right away you'll usually end up paying less in lender fees – points and higher interest rates.
- Pro – No pressure to find a house before the rate lock expires: You don't have to worry about finding a new home before your rate lock expires, you can just take your time knowing you won't have to pay to lock again.
- Con – Rates may go up and you'll pay more on your mortgage: If you do wait, and the mortgage rates go up, you'll likely end up paying more over the life of your loan.
What If My Rate Lock Expires?
Sometimes you may lock an interest rate only to find that you can't close on the home before your rate lock expires. Or you'll see rates drop after you've locked in. What happens next may depend on your lender, and how willing they are to work with you.
- Some lenders may be willing to allow you to float down your rate, for a small fee.
- Some lenders may offer an extension on your rate lock. Usually it will cost in the range of 0.25 of a point for every 15-day extension according to BankRate.com
- You can re-lock at the current interest rate.
It should be noted also that rate locks aren't always guaranteed either. They often now do last minute credit checks, which could cost you if things have changed. If your circumstances change, so could the lock.
Dal Porto says many lenders will negotiate the fee for extending the lock, particularly if the settlement is delayed due to a distressed property needing additional repairs.
Borrowers should also remember that a rate lock is not guaranteed in all circumstances. Borrowers can lose a rate lock if their circumstances change — such as a shift in their credit score or in their debt-to-income ratio — before settlement.
Steps To Take When You Lock In Your Interest Rate
So now that you've decided to lock in your rate, what steps should you take?
- Get the terms of the loan, the interest rates, etc in writing. If it's not in writing it didn't happen!
- Ask your lender for a lock in form. Read over it carefully to make sure you know what you're getting into.
- Figure out from your lender how long loan processing usually takes.
- Figure out what fees there are for locking your rate, and how much it is. Ask if they will apply even if you don't get a loan.
- Decide on how long of a lock you want to put on your rates. Lock-in periods are usually 30-60 days, but can be as short as 7 days, or as long as 90 days.
- Ask your lender how quickly they can lock the rate for you. In some cases it may take a few days (in which case your rates can increase). Locking in at the time you apply is ideal.
So there you go. Locking your interest rate and whether it's a good idea for you really comes down to your personal situation and what's the best fit for you. Do you have a house already under contract, or are you still looking? Are rates currently on a downward trend, or heading up? Could you afford it if the rates did go up while you look?
Be sure to weigh all your options, consider the current mortgage climate and make the best decision for you.